In this paper, Ďa sign restricted Structural Vector Autoregressioní (SVAR) model has been employed to understand the macroeconomic impact of oil shocks on the Indian economy. Following the identification procedure of Baumister et al. (2010), three types of shocks have been identified using sign restrictions, namely, an oil supply shock, oil demand shock created by global economic activity, and oil-specific demand shock. The results based on quarterly data from 1996 Q1 to 2013 Q4 indicate that output growth and inflation in the Indian economy react very differently to different shocks in oil prices.

Description

Fluctuations in crude oil price have been of concern to economists as they have serious implications for the economy. Not only do the fluctuations affect the global economy, but also the individual domestic economies depending on whether the latter exports or imports oil. In view of the fact that India is currently the fourth largest economy in the world to import crude oil and other petroleum products next to the USA, China and Japan (Rangarajan et al., 1981), crude oil price shocks affect the overall price level as well as economic activity in the country through various channels. The average crude oil prices in India from 2000-01 to 2015-16 indicate that there has been a decline from 2014-15 onwards. This decline has further increased India’s dependence on crude oil import by 81% in 2015-16 as compared to 78.5% in 2014-15 (Oil and Natural Gas Report, 2015).

According to the Annual Monetary Policy Report of India (2015), there has been a 50% decline in the crude oil price since June 2015. Though this decline is considered as a favorable external shock for the economy in terms of raising real income of consumers, lowering input costs and thereby increasing corporate profitability and investment, lowering current account deficit and improving market sentiments and expectations, the favorable effects have been offset by a weak global demand. Thus, understanding the macroeconomic impact of the crude oil price shocks on the Indian economy, especially on the economic activity and inflation, has not been a straightforward proposition. There is a need to examine this issue in greater detail.